Why President Will Go Over the Fiscal Cliff Rather than Compromise on Tax Rates

As I write, Drudge is leading with Treasury Secretary Timothy Geithner’s vow that the administration is “absolutely” ready to take the government over the fiscal cliff unless, quoting the story (from CNBC), “tax rates increase on the top 2 percent of wage earners.”

But the House GOP has already conceded higher taxes on the wealth. They just want to get the money through lowering deductions, not upping the top marginal rate. They calculate that the two methods can reap roughly equal revenues. The GOP wants to keep rates low is so as not stifle new business creation and growth, which for a variety of reasons is highly sensitive to personal tax rates. The products of the entrepreneurial renaissance that started in the late 1970s or early 1980s have created all the net new jobs in the U.S. over the past three decades. The GOP wants to reenergize that sector, not stifle it. A sensible strategy.

So having won on revenues from the rich, why doesn’t the White House declare victory and go home? Here is my answer, from my weekly column:

Some believe [the reason for the administration's obsession with revenue from the rich through higher rates not lower deductions] is political. They contend the president wants to take the government over the fiscal cliff, which, thanks to media protection, he can get away with. Then he can blame Republicans for the financial chaos and universal tax hikes that follow, force a complete GOP surrender and take back the House at the next election. How about this as an explanation though? He wants exactly the opposite of what Republicans want – and does so not out of pride or economic ignorance, but for the simplest and most direct of political motives – a key constituency wants it. The constituency I have in mind is organized labor and the motive would be to put a break on the very entrepreneurial renaissance that Republicans so prize. During the George W. Bush years, I proposed to a senior administration official – a board member of a major regulatory agency – that labor’s agenda was not all it seemed. I argued that labor was aggressively targeting the entrepreneurial small and medium-sized business sector, working to put it on the endangered species list. To my surprise he responded that he had wondered why the unions had weighed in aggressively on an issue before his commission on which they had no apparent interest. Desire to slowdown new business creation and expansion would explain it, he said. But why? Why should labor go after the major source of American job creation? It has to do with the simple, classic approach of unions to all competition: stop it. Here is the business problem, if you will, for the leaders of the U.S. labor movement. They are losing market share. They talk a lot about jobs – meaning union jobs – moving overseas. But at least as big an issue for them is the American entrepreneurial renaissance. By and large, the workers of the rising economy have rejected the movement’s attempts to organize them. And in industry after industry, these new and energetic non-union firms have been expanding at the expense of old unionized ones. In other words, one of the president’s major sources of support sees America’s entrepreneurial renaissance as competition and wants to, if not stop it, slow it drastically down. Just to be clear, I am NOT saying this is the president’s motivation. I am suggesting it is the motive of key parts of the union movement. Mr. Obama is just, as they say in this town, dancing with the one that brung him.

Keep the payroll tax cut for all making less than $250,000. (That will, in time, make it easier to remind Americans that the program is a hand out, not a pension).Expand the payroll tax cut for people making less than $40,000.Cut deductions popular with people making over $1 million.If Obama opposes it, point out that he is opposing a tax cut for the poor and a tax hike on the rich because he is an extremist on the tax issue.Also point out that Obama is defending K Street and the big money that pays them by focusing on tax rate hikes rather than revenue increases.

A few days ago I got an email from a leftist friend who was shocked because Rush Limbaugh said the Republicans should not negotiate with Obama over the fiscal cliff. He thought it was awful that a radio host, who can’t actually pass a budget, would put politics before the good of the nation.

Now Obama is suggesting that it would be OK to go over the fiscal cliff if it will make Republicans look bad. So logically, I can only assume that my liberal friend is busy typing another email complaining about how Obama is putting politics above the good of the nation.

Also, was it just discovered on 11/7/12 that Bush tax cuts were set to expire? I don’t recall to much urgency from the White House on this issue in his first 3.75 years as president.

Neither the president or the Democrat Senate have any interest in restraining the growth of government, or keeping it from going broke. So the answer to the title of this item is YES the president and the Democrat Senate will go over the fiscal cliff rather than compromise on tax rates.

On Unions. How about stating that Unions are free to negotiate special loan rates and other deals with banks, but they are not free to run the mortgages themselves. Failing that, perhaps regulating how the profits from such mortgages are spent–a dividend to Union members?

Wait … strategy? Obama stinks at strategy. After all, this is a guy who nominates a fashion queen to be ambassador. He consults with Al Sharpton.

This raises an important point: Obama’s handlers out-strategized Mitt Romney’s handlers. But that wasn’t Obama.

No one thinks that Barack Obama devised the GetOutTheVote scheme. No one thinks that Obama can spell data-mining, never mind take credit for it. The strengths that won the election had nothing to do with Obama personally. The demographics, the campaign marketing … weren’t Obama’s ideas. Obama’s only personal contribution to his own election was a disastrous debate performance.

Now that the campaign is over, we see, once again, what a vapid, vacant leader he is.

Maybe that’s why the campaign operation has created this “permanent campaign” organization – they can’t bring themselves to put let the country actually see Chance the Gardener back in charge.

Going over the fiscal cliff won’t require Obama to actually do anything. Doing nothing is what he’s good at.

Here’s what I’m wondering: if upping marginal rates on the top earners raises roughly the same revenue as lowering deductions, how does the former but not the latter “stifle new business creation and growth?” I know you said that business creation and growth are “…for a variety of reasons…highly sensitive to personal tax rates.” I’d be curious to know those reasons. Both options allegedly suck the same money out of the private sector. So why is one worse than the other?

Is it just the “perception” among the job-creating class of the negative impact of higher marginal tax rates? But if so, aren’t those sorts of people sophisticated enough to understand actual things – like net cash flow – rather than philosophical things – like marginal tax rates – and behave accordingly?

I welcome the auto spending cuts across the board. In fact, I would like the GOP to embrace the spending cuts and, if they’re going to be blamed anyway, hold the entire budget hostage until the Dems are forced to knuckle on entitlements…increasing the eligibility ages of all that wealth transfer. Heck, if done correctly, the GOP could undo minimum wage laws and many regulations…the Dems need the spigot to keep flowing more than the GOP needs it; the GOP actually has leverage if they could find the stones to use it.

dittoheadadt: Here’s what I’m wondering: if upping marginal rates on the top earners raises roughly the same revenue as lowering deductions, how does the former but not the latter “stifle new business creation and growth?” I know you said that business creation and growth are “…for a variety of reasons…highly sensitive to personal tax rates.” … Both options allegedly suck the same money out of the private sector. So why is one worse than the other?

Is it just the “perception” among the job-creating class of the negative impact of higher marginal tax rates? But if so, aren’t those sorts of people sophisticated enough to understand actual things – like net cash flow – rather than philosophical things – like marginal tax rates – and behave accordingly?

I suggest that the incentives are different. Higher rates at the margin turn a potentially good investment into a bad one. I might be willing to invest my money in a risky project if I get to keep enough of the profits, if any.

On the other hand, limiting deductions discourages the activities at which the deductions are targeted, such as owning real estate or charitable giving.

dittoheadadt: Here’s what I’m wondering: if upping marginal rates on the top earners raises roughly the same revenue as lowering deductions, how does the former but not the latter “stifle new business creation and growth?” I know you said that business creation and growth are “…for a variety of reasons…highly sensitive to personal tax rates.” … Both options allegedly suck the same money out of the private sector. So why is one worse than the other?

I suggest that the incentives are different. Higher rates at the margin turn a potentially good investment into a bad one. I might be willing to invest my money in a risky project if I get to keep enough of the profits, if any.

On the other hand, limiting deductions discourages the activities at which the deductions are targeted, such as owning real estate or charitable giving.

Ok, but when the dust settles, isn’t the taxpayer left with the same cash in his pocket, such that the riskier investment is “subsidized” by the greater deductions, thus making it equally risky overall?

Ok, but when the dust settles, isn’t the taxpayer left with the same cash in his pocket, such that the riskier investment is “subsidized” by the greater deductions, thus making it equally risky overall?

Again, if net cash flow is the same either way. · 4 hours ago

I don’t think so.

Take an extreme case of lowering tax rates to near zero and eliminating almost all deductions. The taxpayer will change his behavior to accept many more income opportunities, because he gets to keep all the profits, if any, and he will be less willing to pay so much for his new home, because the mortgage interest isn’t deductible. His net cash flow might turn out to be the same (or not) but his activities will be different, and possibly better for the economy.

After a distracted few days, I’ve come back on and been impressed by the conversation. Here are a couple of replies:

To Peter, who asks the odds of going over the cliff: 75% of going over, if the House GOP holds firm, much lower if they start to splinter.

To dittoheadadt/Howellis on marginal rates: Officially both Ds and Rs assume the method of taxing has no impact on economic growth. Accepting that assumption, their plans yield roughly equal revenues. However, once you lower personal deductions, whether your business grows bigger or gets smaller, your taxes on a new dollar business profit will be unaffected by the change. Meanwhile, if tax rates are kept lower, you will keep more of each dollar of future business profit than you would have with higher rates. So looking ahead for the economy as a whole, with lower rates, more business concepts will look profitable enough to be funded. Each successful business’ cash flow will be larger, allowing faster expansion. Put another way, one approach looks at today only. The other looks at today and tomorrow.